Washington Trust Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Washington Trust is a bank holding company providing commercial, residential and consumer banking, and wealth management services, principally in Rhode Island, eastern Massachusetts and Connecticut.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $47.3 million | $44.6 million | $137.2 million | $129.7 million |
| Net interest income | $30.1 million | $27.4 million | $88.6 million | $81.9 million |
| Net income | $13.0 million | $12.3 million | $37.9 million | $34.3 million |
| Diluted EPS | $0.75 | $0.72 | $2.19 | $1.99 |
| Provision for loan losses | $1.3 million | $1.8 million | $2.4 million | $2.8 million |
| Net interest margin, FTE | 2.93% | 2.94% | 2.92% | 3.07% |
Quarterly and nine-month net income rose 5% and 11%, respectively. Higher net interest income was the principal driver; higher noninterest expense partly offset the gains. Wealth management revenue increased 4% in both periods, while mortgage banking revenue declined 19% for the quarter and 4% year to date. Q3 return on average assets was 1.18% and return on average equity was 12.56%.
Nine-month operating cash flow was $43.6 million; investing cash use was $59.2 million and financing cash provided was $39.1 million. Cash and cash equivalents ended the period at $131.2 million, versus $107.8 million at year-end 2016. Cash dividends declared were $0.39 per share for Q3 and $1.15 year to date.
Financial condition, liquidity and credit
- Total assets were $4.47 billion, up 2% from December 31, 2016. Loans increased 3% to $3.32 billion; deposits increased 3% to $3.16 billion. Securities declined 4% to $727.6 million.
- FHLB advances were $814.0 million, down 4% from year-end. The average rate on advances was 1.81% in Q3, versus 1.52% a year earlier. The Bank reported $420.1 million in remaining FHLB borrowing capacity and a $40 million unused line.
- Shareholders’ equity was $414.2 million; equity/assets was 9.27%. The Corporation’s total risk-based capital ratio was 12.53%, and management reported capital above well-capitalized regulatory thresholds.
- Nonaccrual loans fell to $18.5 million from $22.1 million at year-end; nonperforming assets were $19.5 million, or 0.44% of assets, versus $23.1 million, or 0.53%. Past-due loans declined to $16.4 million from $24.4 million.
- The allowance for loan losses was $27.3 million, or 0.82% of loans, compared with $26.0 million, or 0.80%, at year-end. Net charge-offs were $1.1 million for nine months, down from $4.2 million a year earlier. Potential problem loans nevertheless increased to $10.1 million from $6.8 million, primarily two commercial and industrial relationships that management said were current and well-secured.
- Funding and interest-rate exposure merit attention: deposits funded approximately 61% of average assets, and out-of-market brokered time deposits were $415.8 million. The modeled effect of a 100-basis-point rate decline was a 3.42% reduction in 12-month net interest income; a 100-basis-point increase modeled a 3.04% increase. These are scenarios, not forecasts.
Changes, outlook and notable items
- Net interest income growth reflected larger loan and securities balances, including portfolio purchases made in the second half of 2016, and higher short-term rates on floating-rate loans. Margin remained below the prior-year nine-month level, partly due to lower-yielding asset purchases and higher funding costs.
- Noninterest expense rose 9% in Q3 and 3% year to date. Q3 included an approximately $570,000 charge for an external check-fraud incident. The Bank reimbursed its customer and is pursuing legal recovery from another bank; the outcome is uncertain.
- A $150,000 goodwill impairment was recorded in Q2 after a decision to reduce activities at the wealth-management broker-dealer subsidiary. Management also recorded a $310,000 year-to-date expense reduction from remeasurement of Halsey acquisition contingent consideration. Q3 2016 included a $939,000 benefit from that liability, affecting the year-over-year expense comparison.
- Wealth management assets under administration reached $6.59 billion, up 9% year over year, reflecting market appreciation; nine-month net client flows were negative $129.3 million. Mortgage loans sold to the secondary market declined 4% year to date.
- Management said liquidity remained within internal target ranges and funding was expected to meet anticipated needs. A full-service branch in Coventry, Rhode Island, was planned to open in Q4 2017. The filing provides no specific earnings or financial guidance.
- Risks cited include interest-rate and market volatility, changes in loan demand and credit quality, deposit competition and mix, wealth-asset market values, economic conditions, regulation, cybersecurity and natural disasters. Management did not report material changes to previously disclosed risk factors. It considered ordinary-course legal matters not expected to materially affect results. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether loan growth, deposit mix and funding costs support net interest income and margin as rates and competition change.
- Developments in the $10.1 million potential-problem-loan pool, impaired commercial mortgage relationships, and allowance adequacy.
- Recovery prospects and legal developments relating to the $570,000 fraud loss.
- Whether wealth-management asset appreciation persists, and whether negative client flows or weaker mortgage activity affect fee revenue.
- Liquidity and capital resilience, including reliance on FHLB advances and brokered deposits, alongside the reported rate-sensitivity assumptions.